BOULDER, Colo. -- Wild Oats Markets here last week said competition in certain areas is cutting into its profits. It expects to report a loss for the recently ended third quarter.
The company said gross margins in the period were 27.5% of sales, down from 29.1% of sales in the second quarter. Aggressive pricing and promotions in some markets -- primarily in Southern California and Texas -- combined with the costs of opening new stores have reduced profitability, the company said.
Analysts said they feel the company's woes do not reflect negatively on the natural industry as a whole.
"We feel this problem is company-specific and not endemic to either the natural and organic space, or the high-end retail markets," said Robert Campagnino, analyst, Prudential Equity Group, New York, in research note.
Campagnino said he believes that not only is Wild Oats facing increasing competition from traditional retailers in California and Texas, but also from Austin, Texas-based Whole Foods Market in other regions of the country.
"In our view, [Wild Oats] is faring very poorly in that comparison," he said.
Scott Van Winkle, analyst, Adams Harkness, Boston, said he expects aggressive competition from traditional supermarket operators in Southern California to persist into next year as well. Wild Oats' new prototype, Henry's Farmer's Market, has been ineffective there, he said.
"The traditional retailers have said they are dug in for a battle in Southern California," he told SN. "The core problem is that these Farmer's Markets aren't any different than what's being sold in traditional grocery stores. Grocery stores are moving more toward an improved produce and perishables offering, and that eats right into what Wild Oats is doing in the Henry's Farmer's Market concept."
The new perishables distribution center in Southern California was expected to make the company more competitive, but so far it is "not really paying any dividends," Van Winkle said.
He also said Wild Oats' aggressive new-store development strategy -- a significant element of the company's turnaround plan -- has had mixed results.
"While you can probably say that new stores are performing better than the company average, I think there is a mixed bag among some of their stores," he said. "They end up with new stores that aren't strong enough to offset competitive pressures in a third of the chain, and that is Farmer's Market."
He suggested that in order to get its turnaround effort on track, Wild Oats might have to go back to the drawing board for a new prototype.
Wild Oats said it expects its third-quarter loss to be between 20 cents and 22 cents per share, including non-cash charges of between 8 cents and 10 cents. That compares with a loss of 3 cents per share in the year-ago period and with analysts' estimates of approximately break-even results for the third quarter.
The loss for the full year is projected to be between 13 cents and 17 cents per share, vs. a profit of 12 cents per share last year.
Comparable-store sales are expected to be flat to slightly negative in the third quarter and down 4% to 4.5% in the fourth quarter.
